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UPDATE 1-U.S. corporate bond spreads narrow to multi-year lows

·2 min read

(Adds analyst comments, high yield index details)

CHICAGO, June 15 (Reuters) - Yield spreads on benchmark corporate high-yield and investment-grade bond indexes narrowed to multi-year lows on Monday as investors snapped up debt throughout the credit spectrum amid a willingness to accept more risk for heftier returns.

The yield spread on the ICE BofA U.S. High Yield Index , a commonly used benchmark for the junk bond market, fell to 317 basis points as of late Monday, the lowest since October 2018. For the ICE BofA U.S Investment Grade Index, the yield spread slid to 89 basis points, the lowest since February 2007.

The narrowing of spreads, which refers to the interest rate premium investors demand to hold corporate debt over safer U.S. Treasury bonds, comes as government debt yields are near their lowest levels ever, driving money into securities with lower credit ratings than Treasuries.

Ken Monaghan, co-head of high yield at Amundi US, told the Reuters Global Markets Forum on Tuesday that high-yield spreads "can go tighter though not meaningfully tighter" with the key reason being an increase in bonds rated BB, the highest level in the junk category, where ratings slide down to CCC, CC, and C as a risk of default increases. "(BB-rated bonds) are now nearly 55% of the market versus about 49% at year-end 2019, or 45% 10 years ago,” he said.

Long maturity investment-grade bonds offer "an attractive yield and on a spread basis, particularly to swaps, and could still tighten substantially," Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, told the forum on Monday.

In the high-yield sector, he pointed to value in short maturities.

"Defaults are plummeting - we think as low as 1.5% over the next year - and short maturity (high yield) is pricing in too much default risk given our expectations," Contopoulos said.

The Markit North American High-Yield CDX Index, which acts as a proxy for the broad junk bond market, has been in record high territory for two months and is up 0.7% for the year.

The U.S. Federal Reserve last week began selling its stakes in 16 corporate bond exchange-traded funds as it unwinds a nearly $14 billion portfolio accumulated to help restore order to the market that had become unhinged early in the COVID-19 pandemic. (Reporting by Karen Pierog and Lisa Mattackal; Editing by Alden Bentley, Steve Orlofsky and Lisa Shumaker)